Thank You

Error.

After two tough years, Chinese stocks are rallying. The broad, investable benchmark MSCI China Index has rebounded more than 18% since November, when signs of economic recovery began to emerge consistently. "The sentiment turned because the long-term structural-growth story for China remains intact," says Dennis Lim, a portfolio manager for Franklin Templeton in Singapore. Although more modest than recent gains, the rise should continue, say strategists.

With fears of a hard landing mostly cast aside, investors are increasingly comfortable about China. "There is a realization that in absolute terms, China is still very cheap as a market," says Lim. "Stocks of banks and brokers have done well in recent weeks because of financial deregulation, and property stocks have rebounded because the government has eased back on tightening policies," notes David Cui, China strategist for Bank of America Merrill Lynch.

"The market could be up 15% to 20% this year," says Gao Tin, chief strategist for UBS in Shanghai. It has already gained about 4% in 2013.

Fundamentals look good but not overwhelmingly so. Shares trade at more than 10 times this year's earnings, and earnings are forecast to rise 10% this year. Profit projections are expected to be revised upward soon. "There is often a lag between the time an economy turns and when corporate fundamentals improve, triggering upwards earnings revisions," says Tai Hui, chief Asia strategist at JPMorgan Asset Management in Hong Kong. "China is at an early stage of that expectation-adjustment process," he says.

Jiong Shao, Macquarie Securities China strategist, says the benchmark MSCI China Index is likely to gain 10% to 15% this year from current levels. "We have identified four key reforms that we believe will drive the market," he says. Among them: financial reform, which will aid brokers, insurers, and banks; resource-pricing and resource-tax changes, which will force gas prices up; income redistribution to help the poor; and more environmental protection.

Shao prefers banks, stock brokers, insurers, and utilities. One of his picks is state-owned Agricultural Bank of China, which trades at 5.4 times this year's earnings and yet could boost profits 22% this year. Macquarie has a 4.90 Hong Kong dollars (63.1 U.S. cents) target price, or 25% above recent levels. Another favorite:
Kunlun Energy
(135.Hong Kong), a natural-gas play.